Managerial Extrapolation: Who and When?
44 Pages Posted: 26 Jul 2021
Date Written: July 10, 2021
We show strong over-extrapolation of earnings in the I/B/E/S managerial guidance. Firms whose earnings are less persistent, less volatile, or more salient exhibit more extrapolation. Managers who observe rapid growth in their local housing market also demonstrate more extrapolation, albeit weaker. Over-extrapolation is not particularly related to a manager’s skills or tenure. Exploiting exogenous variations in firms’ profitability resulting from the 2017 Tax Cuts and Jobs Act, we provide clean evidence that managers over-extrapolate past earnings even when earnings experience a temporary shock. Consistent with Bordalo et al. (2020) and Afrouzi et al. (2021), our findings shed light on what factors affect the degree of over-extrapolation.
Keywords: Guidance, Extrapolation, Over-extrapolation, Earnings
JEL Classification: G12, E44, Q43
Suggested Citation: Suggested Citation